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Why Shares of Kansas City Southern Popped Today

By Travis Hoium - Jan 22, 2016 at 12:13PM

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A better-than-expected earnings report may not be a reason to buy this stock.

What: Shares of rail company Kansas City Southern (KSU) jumped as much as 12% in early trading on Wall Street after the company reported fourth-quarter earnings. By noon, shares had settled lower to a 5% gain on the day.

So what: Revenue dropped 7% last quarter to $598 million and net income dropped 1% to $139.3 million, or $1.28 per share. The revenue figure fell short of analysts' expectation of $609.1 million but earnings adjusted for one-time items of $1.23 per share easily topped estimates of $1.10.

Now what: Management has done a good job of lowering costs, with operating expenses down 12% from a year ago. That helped offset a 2% decline in carload volumes, which is the driver of revenue. Despite the stronger-than-expected results, there are still some major uncertainties in 2016. Metals and scrap volume plunged 25% in the fourth quarter and there's no sign that's going to pick up in the near term. Petroleum was also a strength, growing 20% year over year, but that'll likely slow as U.S. oil production falls.

Given the uncertainty and the declining revenues, I wouldn't look at this earnings beat as a reason to buy. Shares are still fairly expensive at 15 times earnings and that could prove expensive if volumes fall further in 2016.

Travis Hoium has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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